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BEST BANKS 2014: NORTH AMERICA

Regional Winner 2014: Bank of America

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MOST BIG BANKS PASS STRESS TEST

May 08, 2014

The banks of North America as a group are fundamentally strong. Of 30 US banks that participated in the Federal Reserve’s second round of stress tests, 25 passed with flying colors, according to results released in March. Following on from that, banks now must keep a reserve ratio of 5% as opposed to 3%. Meanwhile, Fitch Ratings recently reaffirmed its support ratings for large Canadian banks. In the US, however, there is less appetite than before the financial crisis for government support of big banks that risk failing. All three ratings agencies (Fitch, Moody’s Investors Service and Standard & Poor’s) have indicated that they see a smaller role for US government support in a post-Dodd-Frank world, according to an analysis by Barclays. If Standard & Poor’s removes government support from holding company ratings, $220 billion in banking-sector debt may fall to the BBB category from the A category.

There remains a strong probability of support for Canadian banks from that country’s government if required, according to Fitch Ratings. “This expectation reflects Canada’s extremely high ability to support its banks, especially given its financial flexibility, though propensity is becoming less certain,” the ratings agency says. Canadian regulators are seeking to protect taxpayers from the risk of a large financial institution’s failing. Regulators have proposed, for instance, the issuance of nonvoting contingent capital instruments and increased resolution powers for regulatory authorities.

In the US, credit quality indicators—such as net charge-offs, delinquencies and nonperforming asset ratios—have continued to improve, the Comptroller of the Currency, which supervises national banks, said in its most recent assessment of the industry, which was issued last fall. Nevertheless, the banking industry faces significant headwinds, it added.

In its stress tests the Fed also tested the potential damage to banks’ balance sheets from rapidly rising interest rates. It found that all of the banks have adequate capital to withstand such a scenario, although the banks could sustain big loan losses.

Bank of America posted better-than-expected earnings and revenue for the fourth quarter of 2013. For the year as a whole, it had its strongest annual profit since 2007. "The bank has clearly turned the corner after years of cutting costs and closing branches. Its revenue rose 6.7% last year and its profit exceeded $11.4 billion. Brian Moynihan, Bank of America’s CEO, says: “We’ve been on a journey of simplifying our company. As a result of all this work, earnings have improved significantly, but we still have not approached the true earnings potential of the Bank of America.” In late March the Federal Reserve approved the bank’s plan to buy back $4 billion of its shares and to increase its quarterly dividend to five cents from a penny. Meanwhile, Bank of America announced a $9.5 billion settlement with US housing authorities and agreed to buy back mortgage-backed securities that it sold to Fannie Mae and Freddie Mac. After winding down most of its liabilities from the financial crisis, Bank of America is charting a new course for future growth that features wealth management and corporate banking services. In the fourth quarter, its investment banking and trading revenue rose sharply. Overall, its quarterly revenue rose 15% to $21.7 billion."

HSBC Bank Bermuda earned $45 million in 2013, up from $20 million a year earlier. Bermuda’s economy continues to feel the effects of the departure of a few thousand expatriates, a significant rise in the unemployment rate and weakness in the real estate market, according to Standard & Poor’s ratings services. Bermuda is a small economy that is highly dependent on a few industries—financial services, real estate and tourism, S&P says. "HSBC Bank Bermuda’s total allowances as a percentage of gross loans increased to 7% from 4% a year earlier. Michael Schrum, chief financial officer, says: “The impairment allowances were required as a prudent response to continuing stress in both local and international real estate markets, reflecting lower values for both commercial and residential property and higher delinquency levels.”

Royal Bank of Canada reported a 2.2% rise in earnings in its fiscal first quarter ended January 31, beating analysts’ expectations. The bank, Canada’s largest by market capitalization, raised its dividend by 6%. The results were bolstered by a 16% decline in credit provisions. Profit from investor and treasury services, including global custody, rose 34% from a year earlier. RBC recently agreed to sell its Jamaican banking operations. Last year it purchased Ally Financial’s Canadian auto-finance and deposit business. Gordon Nixon, RBC’s president and CEO, says: “We had a solid start to the year. Our results reflect continued strength in Canadian banking and higher earnings in capital markets, investor and treasury services and wealth management.” The bank’s focus on developing innovative products and services and its discipline in controlling costs remain clear competitive advantages, he says. RBC reported higher revenue in the first quarter, compared to the previous quarter, in fixed-income, commodities and foreign-exchange trading businesses."

Bank of America’s core businesses are performing admirably. Earnings at its consumer and business banking division rose nearly 40% to $2 billion in the fourth quarter of 2013 from the same period a year earlier. Bruce Thompson, the bank’s CFO, says: “Capital and liquidity are at record levels, credit losses are at historic lows, our cost savings initiatives are on track and yielding significant savings, and our businesses are seeing good momentum.”

The bank, based in Charlotte, North Carolina, has put many of its problems from the global financial crisis behind it, and its stock price has outperformed its peers’ so far this year. Bank of America’s traditional home mortgage business is shrinking, but it is building up its wealth management operations. Positive signs in the US economy also bode well for the bank in the remainder of this year. Brian Moynihan, president and CEO, says consumers have been spending more using their credit cards recently. “It’s good news from an economy perspective,” he says.